Alcorn Bank and Trust Co. of Corinth, Miss. v. U.S. Fidelity and Guar. Co.

• Decision Date: 20 May 1983
• Docket Number: No. 82-4543,82-4543
• Citation: 705 F.2d 128
• Parties: 36 UCC Rep.Serv. 248 ALCORN BANK AND TRUST COMPANY OF CORINTH, MISSISSIPPI, Plaintiff-Appellant, v. UNITED STATES FIDELITY AND GUARANTY COMPANY, Defendant-Appellee. Summary Calendar.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 128

705 F.2d 128

36 UCC Rep.Serv. 248

ALCORN BANK AND TRUST COMPANY OF CORINTH, MISSISSIPPI Plaintiff-Appellant, v. UNITED STATES FIDELITY AND GUARANTY COMPANY, Defendant-Appellee.

No. 82-4543

Summary Calendar.

United States Court of Appeals Fifth Circuit.

May 20, 1983.

James H. Mathis, Corinth, Miss., for plaintiff-appellant.

Price, Krohn & McLemore, Robert G. Krohn, Corinth, Miss., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Mississippi.

Before CLARK, Chief Judge, POLITZ and HIGGINBOTHAM, Circuit Judges.

POLITZ, Circuit Judge:

Alcorn Bank & Trust Company of Corinth, Mississippi (Alcorn Bank) appeals the adverse grant of summary judgment in its action for recovery on a "Stop Payment or Dishonor Liability Insurance" policy issued to it by United States Fidelity & Guaranty Company (USF & G). Concluding that Alcorn Bank's loss is not covered by the subject liability policy, we affirm.

Facts

Alcorn Bank's comprehensive general liability insurance policy with USF & G included an endorsement entitled "Stop Payment or Dishonor Liability Insurance." Under this provision, the insurer assumed responsibility for those sums for which the bank became liable as damages in certain situations involving dishonored or stop payment checks. The endorsement reads:

The Company will pay on behalf of the Named Insured all sums which the Named Insured shall become legally obligated to pay as damages in connection with any check, note or draft, other than a "travelers check", payable by the Named Insured and drawn, made or accepted by any depositor of the Named Insured and arising out of:

(a) compliance or failure to comply with any notice to stop payment received by the Named Insured;

(b) refusal to pay or to certify such check, note or draft; or

(c) failure to give proper notice of dishonor of such check, note or draft ....

The policy excludes recovery for "liability arising out of dishonest or fraudulent acts of officers or employees of the Named Insured."

Alcorn Bank seeks recovery of $36,064.30 which it paid for one of its depositors, W.M. Rhodes. On May 12, 1980, Alcorn Bank received checks on Rhodes' account, payable to Aycock Equipment Company, which had been routinely processed through the Federal Reserve System. At that time, the balance in Rhodes' account was insufficient to cover the checks. On May 12 and 13, checks from Aycock Equipment Company totaling over $114,000 were deposited to Rhodes' account. As uncollected funds these deposits did not increase Rhodes' balance, which remained insufficient. Notwithstanding this inadequacy, the president of Alcorn Bank, Robert Farmigoni, approved the payment of the checks drawn against Rhodes' account.

On May 14, at the suggestion, perhaps urging, of bank examiners, Alcorn Bank attempted to improve its legal position by issuing notice of dishonor on Rhodes' checks. The effort came too late. Under both Mississippi and federal law, the checks were automatically paid through the Federal Reserve System when they were not timely dishonored. Checks received by a bank through the Federal Reserve System are considered honored by failure to meet a "midnight deadline." See Miss.Code Ann Sec. 75-4-302 (1972); National City Bank v. Motor Contract Co., 119 Ga.App. 208, 166 S.E.2d 742 (Ga.App.1969). Although banks may avoid this automatic payment by filing a notice of dishonor before midnight of the day after receipt, no timely notice was provided by Alcorn Bank. This failure obligated the bank to honor Rhodes' checks to Aycock. Alcorn Bank seeks to recover the amount paid on the checks from its insurer, USF & G.

Alcorn Bank's suit in state court was removed by USF & G to federal court. After full discovery, both parties sought summary judgment. Concluding that the policy does not cover losses sustained by the bank but only those suffered by third persons for which the bank was liable, the court granted summary judgment to USF & G and denied the bank's motion.

The Policy

The insurance contract before us is a comprehensive general liability policy purchased by Alcorn Bank to protect it from various liability exposures. The endorsement at issue focuses on liability arising out of errors in the handling of stop payment or dishonor notices.

Alcorn Bank correctly contends that most of the endorsement's conditions are met: the involved checks were drawn by a depositor, payable by...